Is The Deficit A Threat To A Future Recovery? ,,,,, James K. Galbraith and others give their views

President-elect Barack Obama has said that he plans to cut some government programs, while raising spending overall, out of concern for the surging budget deficit. In today's New York Times, Paul Krugman takes on the idea that deficits always crowd out private investment, arguing that stimulus is good for short term and long-term growth. He says that it would be a mistake to curtail the stimulus to help control the deficit, pointing to two episodes in history when doing this led the United States and Japan into even deeper recessions. Krugman says that cutting the deficit can come later, after a strong recovery has taken place. Is he right?

James K. Galbraith, Professor of Economics, University of Texas

No. The question is grossly misconceived. Right now and for the immediate future, the budget deficit is the only source of demand that can fuel a recovery. Our present problem is not that it is too big, but that it is too small. Far too small.

In principle, economic growth can come from household consumption, business investment, government spending, or exports. This is a tautology, indisputable and known to everyone who has ever opened a textbook.

Household consumption depends on incomes and on credit. The collapse of credit, rooted in the decline of housing values, is at the root of the crisis. In parts of California home values have fallen 50 percent already, which would place them far below the debt owed on the homes in most cases. Quite apart from the fact that the banking sector is in deep trouble, borrowing power has collapsed. For this reason, rescuing the banks, though necessary, has not and will not produce recovery.

.........

In these conditions, only government spending can pull the economy out of the ditch. Government must spend. It must do so by as much as necessary in order to maintain a high level of employment. Aid to states and localities, an infrastructure fund, increased social security benefits, foreclosure relief, loans or grants to industry, a green jobs program -- all can be useful in coping with the crisis. All will, of course, add to the public budget deficit.


http://economy.nationaljournal.com/2008/12/is-the-deficit-a-threat-to-a-f.php#1184661

Your question "is he right?" confuses the issue.

Krugman and Galbraith AGREE with each other. Now is the time that we need a huge stimulus to the economy. Now is not the time to worry about the deficit. The two economists agree about this.

They asked that question to a variety of economists and I thought it might be of interest to some of the readers on DU to see the various answers they gave. That's why the title of my post said..."James K. Galbraith and others give their views." I thought some people would go to the link provided and read the views given by the various economists.

I'm quite aware that both Krugman and Galbraith AGREE with each other. I read Krugmans blog each day and have seen Galbraith on Bill Moyers show and also have read a number of his articles.

Here is a link to the the National Journal economy blog.......and the question asked on 12/1

http://economy.nationaljournal.com/

Monday, December 1, 2008
Is The Deficit A Threat To A Future Recovery?
President-elect Barack Obama has said that he plans to cut some government programs, while raising spending overall, out of concern for the surging budget deficit. In today's New York Times, Paul Krugman takes on the idea that deficits always crowd out private investment, arguing that stimulus is good for short term and long-term growth. He says that it would be a mistake to curtail the stimulus to help control the deficit, pointing to two episodes in history when doing this led the United States and Japan into even deeper recessions. Krugman says that cutting the deficit can come later, after a strong recovery has taken place. Is he right?

-- John Maggs, NationalJournal.com

12 responses: John S. Irons, Martin Regalia, James K. Galbraith, John Maggs, Gene Steuerle, Gary Burtless, Brian Riedl, William Niskanen, Isabel Sawhill, Jeffrey Frankel, Alan J. Auerbach, Edward Leamer